Benchmark interest rate goes up again

As real interest rates remain below the neutral level, the central bank yesterday announced it would raise the benchmark interest rate for the tenth straight quarter by 0.125 percentage points, effective today.

The latest rate increase will see the rediscount rate charged to commercial lenders at 2.75 percent.

The central bank also boosted the rate on accommodations with collateral and the rate on accommodations without collateral to 3.125 percent and 5.0 percent, respectively.

"Following the adjustment, real interest rates are getting closer and closer to the neutral level compared with the previous rate hike [in late September]," central bank governor Perng Fai-nan (彭淮南) said during a press conference after the bank's quarterly board meeting yesterday.

"They're not at the neutral level yet," he added.

Real interest rates are determined by the value of the prime rate minus the consumer price index (CPI).

Citing Directorate General of Budget, Accounting and Statistics (DGBAS) data, Perng said that CPI growth during the first 11 months of the year was only 0.59 percent on the previous year and that the core CPI -- excluding prices of vegetables, fruits, fishery products and energy -- during the period edged up by only 0.52 percent.

"Taiwan's price index growth this year was low and stable but next year, due to a low comparison base and raw material price hikes, CPI growth is expected to edge up to 1.52 percent based on DGBAS estimates," the governor said.

The central bank predicted the price index next year will climb by 1.75 percent and the core CPI to expand by 1.01 percent, still lower than the 2 percent benchmark the government sets for inflationary targeting.

The bank's report showed that excess reserves, reserve money, bank credit, and M2 money supply have all remained at reasonable levels.

In the first 11 months of this year, excess reserves averaged NT$5.7 billion (US$174.5 million), while the year-on-year growth rates of reserve money and bank credit were 5.37 percent and 6.30 percent, respectively. During the same period, the broad monetary aggregate M2 grew by 6.25 percent, staying within the bank's 3.5 percent to 7.5 percent target zone.

Perng said that the bank's fine-tuning approach to interest rates over the past quarters would only have a slight impact on the economy.

He said that for every NT$1 million loan, the monthly interest payment will only increase by NT$500.

Chou Ji (周濟), a director at the Chung-Hua Institute of Economic Research's (CIER, 中經院) economic forecast center and professor of economics at Shih Hsin University, said the bank rate hike is acceptable as it will not gravely affect the economy and will help narrow the wide rate gap between Taiwan and the US.

Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院), cast doubts on the bank's decision as inflation remains tame and next year economic expansion is expected to slow.

"Since global trade volume is expected to shrink next year, I wonder how exporters will be able to remain competitive," Liang said.